CONTRACTS: THE BASICS
I. INTRODUCTIONI. INTRODUCTION
A property owner wants to develop a parcel of land. The homeowner’s dream is to upgrade their home by remodeling or replacing old bathrooms and kitchens. The owners conduct their due diligence and find contractors they can hire for their projects. What is the next step? How can the property owner and contractor outline the specifics of the work and what has been agreed?
The answer to these questions is that a written contract is mandatory. The goal of this article is to discuss contract fundamentals so that the parties to a construction project gain an understanding as to how to protect their interests.
II. WHAT IS A CONTRACT
In its simplest terms a contract is a promise. In the construction arena, typically involving a promise to perform a certain scope of work, for agreed upon compensation, with a definitive completion date.
A well drafted contract will contain certain basic elements, which are necessary requirements to create an enforceable agreement. To ensure the contract will be enforceable, it should contain the following information:
- Date of agreement
- Identification of the parties with contact information
- Description of the scope of work
- Responsibilities regarding scope of work
- Dispute resolution procedures
- Insurance clauses
- Project cost (price)
- Project completion date
A Contract is protection so that all parties are provided with a clear picture of the work that each contractor will be required to perform. The well written contract provides a description of the rights and responsibilities of the parties, providing protection to all contracting parties. While the goal of any project is always a successful completion, disputes do occur, and the contract will provide your framework for the resolution of any dispute.
The following provides a graphic depiction of what can occur when confusion rather than clarity reigns:
III. CHECK LIST
The experienced construction attorney will be familiar with the contractual requirements discussed in this article. However, and while not recommended, in the event a form contract document is used instead of one prepared by a qualified construction attorney, it is important to have a checklist to assist in making sure the contract you choose contains the necessary information to protect your interests. In addition to the basic information described in Section II, your contract checklist should also include verification as to the following:
- Clear and precise description of the scope of work and the responsible party.
- Indemnification Clause
- Specific description of the contract documents, including the plans and specifications.
- All exhibits, such as descriptions of insurance coverage, must be referenced in the contract and included as part of the contract documents.
IV. HIGHLIGHT OF IMPORTANT CLAUSES
The properly documented contract should contain the following clauses which are contained in most construction agreements: 1) The promise made by the contractor that they will perform their work in a good and workmanlike manner, as well as to return for a specified time period to repair or remediate defective work.
Virtually all contracts will include these types of clauses. This type of clause should be included whether you are hired by the owner/developer or as a sub-contractor by the general contractor. In all contractual as well as business relationships, there is an expectation that you are competent and well qualified to perform the scope of work defined by the contract documents.
2) A warranty clause which is essentially an affirmation as to your qualifications to perform the work, as well as that the work will be performed in a quality manner, consistent with industry customs, practices and applicable standards. Most often warranty periods are for one year from the date of completion. The typical warranty clause will include the following elements: i) the equipment and materials will be of good quality and new unless otherwise specified ii) the work will be free from defects and iii) the work will conform to the contract documents.
A warranty serves as motivation to the contractor to make certain that the work is performed in a quality fashion, consistent with the requirements of the contract documents. It helps the contractor to self-police the work, because there is a desire not to be called back to repair or replace defective work. 3) Indemnity arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual. The right to indemnity and the duty to indemnify ordinarily stem from a contractual agreement, which generally protects against liability, loss, or damage.
The indemnity clause seeks to allocate risk between the parties to the contract. It is basically the shifting of a loss/potential loss from one party to another. In the construction setting these risks relate to either bodily injury or property damage, that might occur, which arises from the scope of work defined by the contract documents. 4) CGL (Commercial General Liability) which insures against the risk of bodily injury and/or property damage; including completed operations coverage.
5) Builders Risk which insures against damage to the project or the project materials while the work is in progress.
6) OCP (Owners and Contractors Protective Policy) which insures the owner from liability arising out of the contractor’s operations, with coverage typically being terminated once the project is completed.
Construction, even in today’s world, remains a risky profession. All construction sites, regardless of their size present a multitude of opportunities for accidents, damages and injuries. There are a variety of insurance policies which may be purchased, depending on the risk involved and the policies which have been identified represent the most common forms of protection. 7) Safety provisions are incorporated into or should be incorporated into all contracts.
Similar to the insurance provisions they help to protect the contracting parties as well as clarify responsibilities relating to those who are performing the work. These provisions should include that the contractor performing the work is: i) solely responsible for the safety of its workers ii) responsibilities include supervision of the work to ensure the work performed in an appropriate and safe manner iii) all safety equipment shall be supplied iv) comply with all applicable federal and state laws, OSHA and comparable state and local safety statutes.
8) Closely related to the safety provisions in a contract, are provisions which specify which contractor is ‘in control’ of the actual performance of the work. Control is an important issue because it defines the expertise that a contractor possesses regarding their scope of work. Each contractor should be solely responsible for all decisions regarding the performance of its scope of work, including how that work is performed.
9) Request for additional compensation can only be made for work that has been pre-approved in writing by the Contractor or Owner. During the course of a project, especially a larger project, it is not unusual that there be changes in the scope of work. Requiring a written Change Order, which will outline and confirm the change, including any alteration of the contract price, provides confirmation for the contractor that the change has been authorized. Should any questions arise regarding changes in the work, the contractor can rely upon the authorization extended by the Change Order.
10) Sub-Contractor expressly acknowledges and agrees that all payments which are due and owing as set forth in the Application for Payment are contingent upon Contractor receiving its payment under its general contract with the Owner which includes the Sub-Contractor’s portion of the described work.
Another clause often found in construction contracts relates to when payment must be made by a general contractor. These clauses are typically found in contracts executed between a general contractor and sub-contractor. This clause makes clear that the responsibility of a general contractor to pay its sub-contractor for completed work, is dependent upon the general contractor being paid by the developer/owner for that work. If this clause is present, then the sub-contractor will be unable to demand payment for its completed work until the general contractor has been paid.
The goal of all construction projects is timely completion for the agreed upon price. The project which has a well written contract, providing clarity for the contracting parties, is an excellent beginning to a successful relationship and achieving that goal.